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How much is it going to cost me?

How Much Is It Going To Cost Me?

Because marketing represents the sum total of everything you do to move your product or service to the consumer, many of its components are hard to quantify in dollar terms. How do you put a budget value, for example, on the goodwill your receptionist generates or the word-of-mouth contact that brought you your latest sale? More vitally, how do you budget an amount for marketing that ensures such intangible commodities will continue into the future?

Be Flexible

While it is essential to have a market plan, it is equally essential that the plan not be rooted in cement. By its nature, marketing is a highly flexible, entrepreneurial, fast-moving aspect of your business - it epitomizes the process of planning; the establishment of a general direction or framework of activity within which your moves and decisions may vary quite considerably over time. This adds to the budgeting challenge. How do you estimate the costs of something that may be constantly in flux?

Historically in many companies - and notably in the public sector - the marketing budget has been the most vulnerable in times of trouble and the least well-nourished when things are going well. When a financial crunch comes, the temptation to slash the "soft services" like advertising or marketing becomes overwhelming. The theory behind this is that the economy is in a recession, no-one is buying anything anyway to why throw good money after bad by advertising?

In reality, of course, it is precisely when the going gets toughest that the best marketers get going, commiting the funds they need to restore their corporate and fiscal health and taking the risks required to re-establish their business in the public eye.

Similarly, when the economy is booming and sales are pouring in, the temptation to become complacent and slow down marketing efforts because "business is just walking in the door" is also very strong.

For a while, the danger of this approach remains hidden. But a booming economy brings new competitors into your market many of them marketing ferociously. Long time rivals, too, take the chance to boost their profile and marketshare or move to fill new needs that you have not anticipated. Soon, while your business may be doing well, others start to do even better and your marketshare erodes, along with your profile, your reputation and your perceived ability to meet the expanding nature of your marketplace.

Where Do You Start?

There are several ways to set a marketing budget but, in all honesty, most of them are wrong.

The first method is to take a lump sum amount and arbitrarily assign it to marketing. This brings peace of mind ("yes, we have a marketing budget") and does ensure that at least some market-related work will take place. But, this method bears no relationship to any planning process or goals and the money often just sits there waiting to be pillaged for some other business purpose that has nothing to do with marketing.

The second method is to track down what is historically spent in your business or industry and assign the same amount to marketing. We often hear that the formula of "two to five percent of gross sales" has been allocated to marketing. In the excellent book "How to make advertising work for your small business," (Canadian Small Business Series), author Larry White publishes a list of industries and services with the percentage amounts that they allocate to marketing and advertising. (Bookstores, for example, spend 1.5% - 1.6% of gross sales on this function.)

Again, this method gives you a figure and thus some comfort, but precious little else. It's like going to the grocery store with one hundred dollars and an empty cat and filling up aimlessly instead of following a proper list of needed supplies.

What's more, this method is always based on last year's sales and involves looking backwards instead of forwards. Moreover, it doesn't allow for your own unique needs and special marketing challenges. What's good for the industry sector goose may not be good for your own gander.

Many companies set a marketing budget that mirrors those of their competitors (or best estimate). Again, this negates their own planning process, often forces them into reactive instead of proactive marketing and ties the company up in the psychologically debilitating process of always looking over the shoulder to see if the competition is catching up or pulling ahead.

Finally, some organizations forecast sales for the coming year and assign a percentage of those to marketing. This does indicate forward planning but, again, the same principles about "shooting in the dark" apply.

Project or Task Method

The very best way to budget for marketing is what is known as the Project or Task method. In this system, a company assigns itself some specific marketing tasks throughout the year and develops a realistic financial appraisal of what these are going to cost. The projects may be as relatively unsophisticated as planning for a store opening, or as complex and multifaceted as launching a new product into the United States under the terms of free trade. The same principles still apply:

1. The tasks form part of the overall

marketing plan that has been

developed for the year ahead.

2. They are tied directly into market

objectives (i.e. develop a

store presence in Town X or

capture 0.5% market share in


3. They represent your unique

business plan, the nature of

your enterprise and your business

story - no-one else's.

They are pro-active not reactive.

4. They can usually be costed quite

easily (i.e. cost of store bunting

$15, cost of media campaign in

Ohio trade journals $25,000).

5. They can be tied to objectives

and measured (i.e. we got the 75

people we needed to the open

house, we managed 0.3% share

in year one.)

6. They can be used as a basis for

developing next year's project-oriented


Regardless of whether times are good or bad, a company ultimately lives and dies by its marketing, no matter how that marketing may be expressed. Resist the temptation to eliminate your market budget when times get tough. Of equal importance, continue to market assertively when the economy is ebullient.
COPYRIGHT 1989 Canadian Institute of Management
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Marketing: A Series
Author:Barrow, Peter
Publication:Canadian Manager
Date:Dec 22, 1989
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